Following the Government’s announcement in September and confirmed in the Autumn Budget on 17 October 2021, there will be a new Health and Social Care Levy (HSCL) introduced in 2022/23. This will mean;
- An additional 1.25% in National Insurance Contributions (NICs) for both Employers and workers, and
- 1.25% tax rate increase on dividend income.
In 2023/24, NICs will revert to their current levels and the HSCL will become a separate charge – which will also be paid on earnings of employees and self-employed over the State Pension Age.
The new HSCL reinforces that profits should be extracted by way of dividends rather than salary. Although there is an increase in dividend tax rates, for a salary strategy there will be two 1.25% increases – one on Employee class 1 (Primary) NICs and the other on Employer class 1 (Secondary) NICs.
However, the client must bear in mind whether they will be impacted by the changes to corporation tax rates due to applying from 1 April 2023.
The increase to Corporation Tax rates is due to apply from 1 April 2023.
- Profits up to £50,000 will still be taxed at 19%.
- Profits above £50,000 will be taxed at 25%
- Profits above £50,000 but less than £250,000 receive marginal relief of 3/200 – which means these profit amounts above £50,000 are taxed at 26.5%.
Taxed at 19% = £9,500
Profits of £60,000
Taxed at 25% = £15,000
less marginal relief [(250,000 – 60,000) x 3/200]= £2,850
Tax liability = £12,150
Therefore on additional £10,000 profit, extra £2,650 (12,150 – 9,500) tax paid effective rate of 26.5%
The Corporation Tax charges calculator will show the impact of extracting profits as a salary compared to dividends taking account of the Health and Social Care Levy and assuming Corporation Tax rates of 19%, 25% and 26.5%.